Property investors are venturing to Spain, Italy and even Greece in
search of bargains, reasoning that the lure of higher returns trumps the
risk that Southern Europe will remain mired in sluggish growth.
Investors are venturing to Spain, Italy and even Greece in search of
bargains on commercial property, reasoning that the lure of higher
returns trumps the risk that Southern Europe will remain mired in
sluggish growth.
For much of the extended slowdown that plagued the European Union,
many investors focused on offices and high-end residences in cities such
as London and Paris, where real-estate markets came through the euro
crisis in relatively good shape.
While rents and occupancy levels in Southern Europe remain anemic,
the region is benefiting from the widespread belief that the worst of
the financial crisis has passed.
“People are just waking up to the fact that Spain didn’t fall into
the Mediterranean,” says Eric Adler, chief executive of Prudential Real
Estate Investors, which invested about $1.5 billion in European real
estate in 2013 and is hoping to do more this year.
Last year, investors purchased €177.8 billion ($245.3 billion) of
commercial property in Europe, up 17% from the prior year and the
highest since 2007, according to Real Capital Analytics.
In Southern Europe—comprising Spain, Portugal, Italy and
Greece—transactions picked up speed in the fourth quarter, with deals
doubling from a year earlier to €3 billion, according to broker JLL,
formerly Jones Lang LaSalle.
Among this year’s transactions in the region was the €61 million
purchase by a UBS real-estate fund of a shopping center in San
Sebastian, Spain with 62 stores and 11 restaurants.
International investors are even looking at Greece, the
longest-suffering country in the euro zone, where the economy has shrunk
more than a quarter since 2008.
Houston-based Hines is considering investing in the Greek hotel and
retail sectors because tourists are “pouring in” while many property
owners and their lenders remain financially distressed, says Michael
J.G. Topham, chief executive of Europe for Hines, which controls assets
valued at approximately $25.2 billion.
“They need us,” Mr. Topham says.
The surge in real-estate deal volume in Europe is part of a broader
trend resulting from the low interest-rate environment in much of the
world. Pension funds and other institutions are increasing allocations
to real estate in the hunt for higher returns, something Spain and Italy
both offer.
For example, the largest public U.S. pension funds last year
increased their allocations to global real estate to 7.4%, according to
Wilshire Consulting. Before that, the high-mark for this group was 6.4%
in 2008, says the National Association of State Retirement
Administrators, which tracks public pension-fund investments.
Opportunistic investors also are scooping up portfolios of distressed
property loans that European banks are trying to get off their balance
sheets. Commerzbank AG has seen high demand for Project Octopus, its
portfolio of Spanish property loans with a face value of €4.4 billion
that will be one of the biggest such deals in Europe this year.
Some of the big investors in Europe continue to be U.S.
private-equity funds that showed up early, including Blackstone Group
LP, Lone Star Funds, Apollo Global Management LLC, Cerberus Capital
Management and Kennedy Wilson Holdings. Pacific Investment Management
Co., the giant Newport Beach, Calif., asset manager, also has been
looking at deals.
Blackstone Group last week closed a €5 billion Europe-only property
fund, the largest ever of its kind, which it raised in just six months.
Recent Blackstone deals include a purchase of a portfolio of Italian
offices and retail centers from AXA Immoselect, an open-ended German
investment fund, for about €180 million, according to a person familiar
with the deal.
New players also are showing up on the Continent from countries such
as South Korea, Malaysia and China. Chinese property developer Dalian
Wanda Group, for example, purchased an iconic Madrid skyscraper for €280
million from Spanish lender Santander, according to data from Real
Capital Analytics. At the end of last year, sovereign-wealth fund China
Investment Corp. acquired Chiswick Park, one of London’s largest office
developments, from Blackstone for 780 million British pounds.
Other sovereign-wealth funds are turning to European real estate,
too. Such funds invested €13.6 billion in European real estate last
year, a 31% increase in activity from 2012, Real Capital data show.
Globally, allocation to real estate from sovereign-wealth funds
increased only 9%.
Until recently, investors in European real estate had little appetite
for risk. Most of the deals involved trophy, fully-leased office
buildings, shopping centers and other properties in cities like London
and Paris.
But demand for those so-called core properties drove up prices to the
point that some are now at record values, reducing yields for buyers.
For example, an investor buying a core property in London today would
wind up with less than a 5% annual yield from the building’s income.
By contrast, in markets such as Spain, yields are over 6%. That has
set off a rush for property in that country, putting upward pressure on
prices, according to real-estate executives in Spain. “It wasn’t like
the sun slowly going up,” said Rupert Lea, head of retail for
real-estate broker Cushman & Wakefield Inc. in Spain, describing the
increasing interest. “It was like a ricochet.”
Some owners are taking advantage of the interest by putting property
on the block. The Spanish region of Catalonia, for example, plans to
meet with international investors in New York this week to drum up
interest in a portfolio of 13 buildings in Barcelona.
The roadshow was in London last week. Even the investor presentation in Barcelona was conducted in English.
“Many investors we are meeting have mandates to invest in Spain,”
said Isabel Tornabell, a director in Catalonia’s real-estate office.
“That’s something new…they are looking for what to buy, not if.”
But as demand increases for property in riskier markets, some experts
are warning that investors are moving too quickly given the tepid pace
of the economic recovery.
“When the pendulum swings back, it almost always overshoots,” said
Ric Lewis, chief executive at Tristan Capital Partners, a private-equity
firm that recently raised €950 million for an opportunistic fund aimed
at buying distressed European assets. Demand for the vehicle was €5
million oversubscribed, he said.
Mr. Lewis said competition has got hotter in the past three months,
and he often gets outbid for individual assets by as much as 30%. “I
think we’ve making a pretty good bid on the fundamentals. And we’re
wrong by 30%? These aren’t complicated assets,” he says.
Source: stream.wsj.com/
